A couple of general items here before we get to today's business. For all our readers who were unable to join us in the Casey Pavilion at the 2012 Cambridge Vancouver Investment Conference, we're happy to offer the next best thing – a video compilation of the best presentations from the event. It's a great watch if you have some time and want to increase the breadth and depth of your investment knowledge.

If you like those talks, perhaps a trip to Florida should become part of your April plans. Casey Research is hosting the "Plan B" Summit at the Hyatt Bonaventure in Weston, FL from April 27-29.

Wondering about the name? Well, for most investors "Plan A" is now out the window. If we as investors want to preserve our capital and to profit, it's time to get serious about finding alternative ways to get through trying times in the best possible shape. This is what the Casey Research "Plan B" Summit will revolve around – with relevant analysis and practical investment advice from a blue-ribbon faculty. Learn more about the Summit or pre-register now for early-bird pricing –it runs through March 2, so act fast.

Marin Katusa

Chief Energy Investment Strategist
Casey Research

It Pays to Stick to the Science

By Marin Katusa, Chief Energy Investment Strategist

Does fracking make tap water flammable? Is crude from Canada's oil sands the dirtiest source of energy on the planet? Based on a typical article in the mainstream media, you could easily conclude the obvious answer to both questions is "yes."

Turns out the science says otherwise. At the annual meeting of the American Association for the Advancement of Science (AAAS) last week in Vancouver, two leading researchers released studies that countered precisely those claims: Chip Groat of the University of Texas found "no direct connection" between fracking and groundwater contamination, while Andrew Weaver of the University of Victoria determined that emissions from Alberta's oil sands are unlikely to make a big difference to global warming (coal, however, poses a major threat).

Our goal here is not to snub environmentalists. Rather, we highlight these revelations to point out that science is the only tool we have to determine whether new techniques to access energy are viable. We chose that adjective carefully: a viable energy-extraction technique today is not simply one that can turn a profit but one that is also low impact, clean, and efficient.

The problem is that these characteristics are difficult to define, and that leaves them vulnerable to manipulation. There are lots of parties out there hard at work spinning tales to meet their ends. Environmentalists want to paint every fossil-fuel advancement with a black brush; energy companies want people to understand that there is no clean way to meet today's energy demands; and politicians support or decry energy decisions based on their agenda of the day (and, dare we observe cynically, the amount of lobbyist funds going into their re-election campaigns).

Moreover, energy issues bear two other challenging attributes. First, they often involve science that is pretty complicated for the average person to understand. Second, the global population increasingly understands that decisions about how we will power our future carry major significance for the future of our planet. Together, these factors mean that a lot of people want to participate in a debate they don't fully understand, which results in a heck of a lot of misinformed parroting and insufficient questioning.

That is precisely why the average consumer of mainstream media probably believes that fracking contaminates water supplies and oil-sands crude is the worst form of energy on the planet – these two pieces of misinformation have been repeated so often and questioned so little that they would seem to be carved in stone.

Even for those skeptical of the media, it can be very difficult to decipher what is data and what is spin. For every "study" funded by the oil industry, there is a "review" supported by Greenpeace that reaches the opposite conclusion. When issues take on public prominence, the debate can quickly become very odd: in the Keystone XL ruckus, the media placed quotes from B-list celebrities on an equal footing with those from TransCanada Corp. representatives.

Public perceptions of energy projects, techniques, and companies really do matter. Public opinion plays a role in defining regulations and deciding on project permits. So how is an investor supposed to navigate this muddy quagmire, where data and spin are so difficult to differentiate? With science – real, objective science. The conclusions presented at the AAAS meeting were drawn from objective scientific experiments; those are the only kind we pay attention to here at Casey Research. Based on the data we gather from those experiments, we predict how an energy debate will play out. At the end of the day, there are three factors that shape our energy future: scientific data, economic realities, and international relations.

It turns out those are our areas of expertise.

The New Science

Let's take a quick look at the new data on fracking and on the oil sands. The fracking study, led by Groat and funded by the Energy Institute at the University of Texas, looked at parts of Texas, Pennsylvania, and New York where gas producers have used horizontal fracturing on their wells. His team found that groundwater contamination, where reported, can often be traced to aboveground mishandling of frac wastewater – leaking storage units and spills.

They did not find evidence that the fracturing process contaminates aquifers. As for the flammable tap water, Groat concluded it was likely due to ground spills and naturally occurring methane.

In finding "no direct connection" between fracking and groundwater contamination, Groat has shown fracking to be no different from other oil and gas extraction techniques, as all are prone to leaks and spills of one kind or another.

The fracking industry and its supporters have long argued that any groundwater contamination near fracs was due to spills and leaks. In fact, the industry and its regulators have been trying to reduce leakage, and one of the companies we recently recommended to our subscribers is riding a wave of demand for better frac fluid storage equipment. That recommendation is already up almost 60% in less than three months.

That recommendation was based on our knowledge of the data regarding the strengths and weaknesses of the fracking industry. This is the benefit we gain from our expertise in the energy industry.

The other study released at the AAAS of interest to us came from Andrew Weaver, one of Canada's most-respected climate scientists and the lead author on two reports from the United Nations Intergovernmental Panel on Climate Change. Weaver and his colleague Neil Stewart analyzed how burning the world's entire reserves of coal, oil, and natural gas would affect temperatures; the results were published in the prestigious journal Nature.

The carbon dioxide released from burning all 170 billion barrels of commercially recoverable oil in the sands would raise world temperatures by all of 0.03° C. If all the 1.8 trillion barrels of bitumen in the oil sands were mined and burned – a very, very unlikely scenario – global temps would rise 0.36° C.

By comparison, burning all of the world's vast coal deposits would push temperatures up by 15° C., and burning the new global bounty of shale gas would make the world 3° C. hotter.

"The conventional and unconventional oil is not the problem with global warming," Dr. Weaver said. "The problem is coal and unconventional natural gas."

It is very nice to see this point scientifically established – the Keystone XL debate was riddled with wild claims about the devastating emissions from oil sands crude. We cringed at each one, because we know most of the claims are bogus. We had already done the calculations and knew that the oil sands are a viable resource. That's why we have long supported the Keystone XL pipeline and are confident it will gain approval in the medium term, because both science and economics support it.

We expect to see more studies confirming both of these conclusions, and as the scientific proof builds eventually the environmentalists, politicians, and media types – heck, even the B-list actors – will have to accept it.

The Economics

We've been discussing data on energy extraction techniques. There's another set of data that matters when it comes to making energy-industry investment decisions: economics.

To understand global economics, one has to understand not only what the numbers and trends mean, but how that meaning will play out on the world stage. International relations and the oil market are intricately intertwined. "Nuclear power" has more than one meaning. Nations either have energy resources or they need them.

This is where it becomes so complicated. As an investor, you might understand the science behind natural-gas fracking. You might also understand how natural gas is priced and how the supply glut from shale gas production in the US has depressed gas prices in North America. But how do you take advantage of that knowledge to make a good investment decision?

Given enough time to research and learn, you could likely come up with a pretty good idea. But here's the catch: you don't have the time. You have a full-time job, which takes up your mental capacity and a lot of your time, and you have a personal life too. Taking on learning all this would be another full-time job. That's where advice from professionals comes in.

Figuring this stuff out is our full-time job. That's why the upcoming issue of the Casey Energy Report contains two recommendations derived from our dissection of North America's natural-gas sector.

It all Plays out on a World Stage

Even world leaders often cannot see through the spin to the science. In some ways that's no surprise, seeing as more spin is thrown at them than at anyone else and they tend not to be scientists themselves. But our leaders have teams of experts advising them, who you might think would see through the accolades and condemnations. Not so much. A perfect example is currently playing out in the European Union.

The EU is developing a fuel-quality directive that seeks to reduce the carbon footprint of fuels by 6% over the next decade. That is fine, but the directive then places fuel from most conventional reserves into a low-carbon category while giving oil-sands crude a carbon rating 23% higher, putting it in the high-carbon category. Oil-sands supporters have argued vocally that the rule singles out oil-sands crude in a discriminatory, arbitrary, and unscientific way.

While the directive is motivated by a good and noble cause, in acting on that cause politicians cannot help but do what they do best: politic. We at Casey Research do something else best: interpret data on the energy industry in the light of global economics and international relations to seek out rewarding investment opportunities.

That's what ignoring the spin and sticking to the science lets you do.

[There's an oil crisis in the Middle East, but it has nothing to do with Iran. Learn more about it.]

Additional Links and Reads

The finalization of a second Greek bailout package gave investors some optimism around a European economic recovery, lifting demand predictions slightly. At the same time, Iran halted oil sales to France and Britain, increasing supply tensions. As a result, oil prices climbed to their highest levels in nine months, with Brent for April settlement reaching US$121.38 per barrel and West Texas Intermediate for March delivery climbing as high as US$106.07 a barrel.

Even as a second Greek bailout and increasing Iranian tensions drive oil prices up, the shale oil boom in North America continues to hold prices back here relative to the rest of the world. The result is a sharp disconnect between international oil prices and what US and Canadian producers can get for their crude, a divergence that will only widen if refiners and pipeline companies fail to keep up with rising production.

The decision to ban oil imports from Iran is intended to punish Tehran for its nuclear program, but businesses and consumers across the EU are starting to pay a financial penalty for the move as near-record prices for crude oil in sterling and euros are compounding the misery many firms and households were already feeling as a result of the region's debt crisis and faltering growth. Swing producers in the Middle East were supposed to be able to make up for the loss of Iranian oil, thus eliminating price increases, but it has not worked out that way – prices are currently at nine-month highs, when priced in US dollars. However, the weakness in the euro and the British pound compounds the problem, lifting oil prices in sterling past their 2008 peaks and prices in euros within 2% of those highs.

A team of United Nations inspectors arrived in Tehran on Monday for its second visit in three weeks, with a goal of assessing the "possible military dimensions" of Iran's nuclear program. The visit is just one of the factors adding to Iranian-global tensions. The Iranian government has halted oil shipments to Britain and France after warning it would cut off exports to European powers it deems 'hostile.' Tehran also mentioned the possibility of pre-emptively banning oil shipments to Spain, the Netherlands, Greece, Germany, Italy, and Portugal. And even while British and US leaders tried to dissuade Israel from contemplating a military strike at Iran's nuclear facilities, President Ahmadinejad announced the achievement of enhanced enrichment capabilities.

According to two industry executives familiar with the talks, Iran is struggling to find a buyer for nearly a quarter of its annual oil exports as looming sanctions start to bite the world's third-biggest crude exporter. Tehran is trying to sell an extra 500,000 barrels a day to Chinese and Indian refiners, but if it cannot find a buyer by mid-March, Iran will be forced to either put unsold barrels into floating storage in supertankers or reduce output. Either measure would push prices, which are already nearing 12-month highs, even higher.

Faced with the prospect of low prices for the next 12-24 months, natural gas producers are starting to sell off assets to preserve cash. Early last week, Chesapeake Energy announced the US$10-billion sale of non-core assets to raise cash. Then on Friday, Canadian natural gas giant Encana announced a C$2.9-billion partnership with Mitsubishi Corp, which is buying a 40% stake in Encana's Cutbank Ridge project in British Columbia. Encana also slashed its capital spending plans for 2012: the company now plans to spend US$2.9 billion, significantly less than the US$4.6 billion it shelled out in 2011.

In a deal that reflects the booming growth in North America's oil-sands and shale-gas industries, San Francisco-based URS struck a friendly deal to buy Flint for $1.25 billion. URS will also assume $225 million in debt from Flint. The deal gives URS a long list of new customers in the booming oil and gas fields of British Columbia, Alberta, and the southwest, Appalachian, and Rocky Mountain regions of the United States.

Coal demand in the US is collapsing as power companies switch away from the fuel to take advantage of the cheapest natural gas in ten years. Appalachian coal, the US benchmark for thermal coal, sank 15% in January and is down 26% from its 2011 high. The price drop has prompted several major producers to close mines. Total consumption for the week ended February 16 was down 4.3% from a year earlier.